SOUTHSIDE BANCSHARES INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002
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OR

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM to
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Commission file number 0-12247
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SOUTHSIDE BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

TEXAS 75-1848732
- ------------------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1201 S. Beckham, Tyler, Texas 75701
- ------------------------------------------- -------------------------------
(Address of principal executive offices) (Zip Code)

(Registrant's telephone number, including area code) 903-531-7111
------------------

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]. No [ ].

The number of shares outstanding of each of the issuer's classes of
capital stock as of October 31, 2002 was 8,325,886 shares of Common Stock, par
value $1.25.

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share amounts)

The accompanying notes are an integral part of these consolidated financial
statements.

1

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)

The accompanying notes are an integral part of these consolidated financial
statements.

2

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)
(in thousands, except per share amounts)

The accompanying notes are an integral part of these consolidated financial
statements.

3

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
(in thousands)

4

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (continued)
(unaudited)
(in thousands)

The accompanying notes are an integral part of these consolidated financial
statements.

5

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS

1. Basis of Presentation

The consolidated balance sheet as of September 30, 2002, and the related
consolidated statements of income, shareholders' equity and cash flow for the
quarters and nine-month periods ended September 30, 2002 and 2001 are
unaudited; in the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been included. Such adjustments
consisted only of normal recurring items. Interim results are not necessarily
indicative of results for a full year. These financial statements should be
read in conjunction with the financial statements and notes thereto in the
Company's latest annual report on Form 10-K. All share data has been adjusted
to give retroactive recognition to stock splits and stock dividends.

2. Earnings Per Share

Earnings per share on a basic and diluted basis has been adjusted to give
retroactive recognition to stock splits and stock dividends and is calculated
as follows (in thousands, except per share amounts):

The accompanying notes are an integral part of these consolidated financial
statements.

6

3. Comprehensive Income

The components of accumulated comprehensive income are as follows:

7

4. Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 141 "Business Combinations" (FAS 141) and
Statement of Financial Accounting Standard No. 142 "Goodwill and Other
Intangible Assets" (FAS 142). FAS 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
Under FAS 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually (or more frequently if impairment
indicators arise) for impairment. Separable intangible assets that are not
deemed to have indefinite lives will continue to be amortized over their useful
lives (but with no maximum life). The amortization provisions of FAS 142 apply
to goodwill and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, the Company was
required to adopt FAS 142 effective January 1, 2002. The adoption of this new
accounting pronouncement did not have a material impact on the Company's
consolidated financial position or results of operations.

In June 2001, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 143, "Accounting for Asset Retirement Obligations" (FAS
143). FAS 143 requires liability recognition for retirement obligations
associated with tangible long-lived assets. The obligations included within the
scope of FAS 143 are those for which a company faces a legal obligation for
settlement. The initial measurement of the asset retirement obligation is to be
at fair value. The asset retirement cost equal to the fair value of the
retirement obligation is to be capitalized as part of the cost of the related
long-lived asset and amortized to expense over the useful life of the asset. FAS
143 is effective for all fiscal years beginning after June 15, 2002. The Company
does not believe that FAS 143 will have a material impact on its consolidated
financial statements.

In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 144, "Accounting for the Impairment and
Disposal of Long-lived Assets" (FAS 144). This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
FAS 144 supercedes FAS 121, "Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed of" and the accounting and reporting
provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of the business previously defined
in that opinion. FAS 144 also amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements" to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The provisions of
this statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. The adoption of FAS 144 did not have a material impact on its
consolidated financial statements.

In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 145, "Rescission of FAS 4, 44, and 64,
Amendment of FAS 13, and Technical Corrections" (FAS 145). This statement
updates, clarifies and simplifies existing accounting pronouncements with
respect to the accounting for gains and losses from the extinguishments of debt.
FAS 4 required all gains and losses from extinguishments of debt to be
aggregated and, if material, classified as an extraordinary item, net of related
tax effect. As a result of the rescission of FAS 4, the criteria in APB Opinion
No. 30 will now be used to classify those gains and losses. The provisions of
this statement are applicable to transactions occurring after May 15, 2002. The
Company does not believe that FAS 145 will have a material impact on its
consolidated financial statements.

8

In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" (FAS 146). This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The principal
difference between this Statement and Issue 94-3 relates to its requirements for
recognition of a liability for a cost associated with an exit or disposal
activity. This Statement requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred. Under
Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized
at the date of an entity's commitment to an exit plan. A fundamental conclusion
reached by the Board in this Statement is that an entity's commitment to a plan,
by itself, does not create a present obligation to others that meets the
definition of a liability. Therefore, this Statement eliminates the definition
and requirements for recognition of exit costs in Issue 94-3. This Statement
also establishes that fair value is the objective for initial measurement of the
liability. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The Company does not believe that FAS 146 will have a material
impact on its consolidated financial statements.

In October 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 147, "Acquisitions of Certain Financial
Institutions" (FAS 147). This statement is an amendment of FAS Statements No. 72
and 144 and FAS Interpretation No. 9. FAS Statement No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions", and FASB Interpretation
No. 9, "Applying APB Opinions No. 16 and 17 When a Savings and Loan Association
or a Similar Institution Is Acquired in a Business Combination Accounted for by
the Purchase Method", provided interpretive guidance on the application of the
purchase method to acquisitions of financial institutions. Except for
transactions between two or more mutual enterprises, this Statement removes
acquisitions of financial institutions from the scope of both FAS 72 and
Interpretation 9 and requires that those transactions be accounted for in
accordance with FAS 141, "Business Combinations", and FAS 142, "Goodwill and
Other Intangible Assets." Thus, the requirement in paragraph 5 of FAS 72 to
recognize (and subsequently amortize) any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable intangible
assets acquired as an unidentifiable intangible asset no longer applies to
acquisitions within the scope of this Statement. In addition, this Statement
amends FAS 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," to include in its scope long-term customer-relationship intangible
assets of financial institutions such as depositor- and borrower-relationship
intangible assets and credit cardholder intangible assets. Consequently, those
intangible assets are subject to the same undiscounted cash flow recoverability
test and impairment loss recognition and measurement provisions that FAS 144
requires for other long-lived assets that are held and used. The Company does
not believe that FAS 147 will have a material impact on its consolidated
financial statements.

9

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Nine months ended September 30, 2002 compared to September 30,
2001.

The following is a discussion of the consolidated financial condition, changes
in financial condition, and results of operations of Southside Bancshares, Inc.
(the "Company"), and should be read and reviewed in conjunction with the
financial statements, and the notes thereto, in this presentation and in the
Company's latest report on Form 10-K.

The Company reported an increase in net income for the quarter and nine months
ended September 30, 2002 compared to the same period in 2001. Net income for the
quarter and nine months ended September 30, 2002 was $4.1 million and $10.3
million compared to $2.8 million and $7.9 million for the same period in 2001.

All share data has been adjusted to give retroactive recognition to stock splits
and stock dividends.

Forward-Looking Information

Certain statements of other than historical fact that are contained in this
document and in written material, press releases and oral statements issued by
or on behalf of the Company may be considered to be "forward-looking statements"
as that term is defined in the Private Securities Litigation Reform Act of 1995.
These statements may include words such as "expect," "estimate," "project,"
"anticipate," "should," "intend," "probability," "risk," "target," "objective"
and similar expressions. Forward-looking statements are subject to significant
risks and uncertainties and the Company's actual results may differ materially
from the results discussed in the forward-looking statements. For example,
certain market risk disclosures are dependent on choices about key model
characteristics and assumptions and are subject to various limitations. See
"Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations." By their nature, certain of the market risk disclosures
are only estimates and could be materially different from what actually occurs
in the future. As a result, actual income gains and losses could materially
differ from those that have been estimated. Other factors that could cause
actual results to differ materially from forward-looking statements include, but
are not limited to general economic conditions, either nationally or in the
State of Texas, legislation or regulatory changes which adversely affect the
businesses in which the Company is engaged, changes in the interest rate
environment which reduce interest margins and may impact prepayments on the
mortgage-backed securities portfolio, changes effecting the leverage strategy,
significant increases in competition in the banking and financial services
industry, changes in consumer spending, borrowing and saving habits,
technological changes, the Company's ability to increase market share and
control expenses, the effect of compliance with legislation or regulatory
changes, the effect of changes in accounting policies and practices and the
costs and effects of unanticipated litigation.

Net Interest Income

Net interest income for the nine months ended September 30, 2002 was $25.1
million, an increase of $2.9 million or 12.9% for the nine months when compared
to the same period in 2001. Average interest earning assets increased $46.9
million or 4.1%, while the net interest spread increased from 2.12% at September
30, 2001 to 2.67% at September 30, 2002 and the net margin increased from 2.89%
at September 30, 2001 to 3.19% at September 30, 2002. The increase in net
interest spread and margin is primarily a result of the decrease in interest
expense on the brokered Certificates of Deposit (CD's) called during the first
six months of 2001. Lower mortgage interest rates during the last three to four
months have led to substantially increased residential mortgage refinancings
nationwide and in the Company's market area. Increased prepayments associated
with the Company's mortgage-backed securities and residential mortgage loans may
reduce Southside's net interest margin during the fourth quarter. This may be
partially offset by fee income from the sale of mortgage loans into the
secondary market due to the volume of refinancing that the Company is currently
handling in its market area.

During the nine months ended September 30, 2002, Average Loans, funded primarily
by the growth in average deposits increased $41.6 million or 8.3%, compared to
the same period in 2001. The average yield on loans decreased from 8.33% at
September 30, 2001 to 7.28% at September 30, 2002 reflective of the overall
decrease in interest rates during the year.

During the third quarter ended September 30, 2002 the Company decided to close
Countywide Loans, Inc., the Company's consumer finance subsidiary. The Company
determined it could better utilize its resources concentrating on core banking
products. A portion of the assets were sold to a finance company and Southside
Bank retained a portion of the loans for the banks loan portfolio. The net cost
associated with closing this subsidiary should be less than $60,000, net of tax.

10

Average Securities increased $4.8 million or 0.8% for the nine months ended
September 30, 2002 when compared to the same period in 2001. This increase was a
direct result of increases in deposits and the leverage strategy implemented in
1998. The overall yield on Average Securities decreased to 5.59% during the nine
months ended September 30, 2002 from 6.50% during the same period in 2001. The
decrease is reflective of overall lower interest rates, increased prepayment
speeds on mortgage-backed securities which led to increased amortization expense
and a restructuring of a portion of the securities portfolio in an effort to
lower duration.

Income from equity securities, interest income from federal funds and other
interest earning assets decreased $281,000 or 34.1% for the nine months ended
September 30, 2002 when compared to 2001 as a result of the decrease in the
average yield from 4.62% in 2001 to 2.98% at September 30, 2002, due to lower
interest rates.

Total interest expense decreased $9.6 million or 25.9% to $27.6 million during
the nine months ended September 30, 2002 as compared to $37.3 million during the
same period in 2001. The decrease was attributable to a decrease in the average
yield on interest bearing liabilities from 5.15% at September 30, 2001 to 3.64%
at September 30, 2002. Average Interest Bearing Deposits increased $40.8 million
or 7.4% while the average rate paid decreased from 4.84% at September 30, 2001
to 2.81% at September 30, 2002, which is due in part to the call of the higher
cost long-term brokered CDs during 2001.

During March 2001, the Company notified CD holders that $24.6 million of
brokered CDs were being called April 12, 2001. The Company recorded $195,000 of
additional interest expense associated with the call of the CDs during the first
quarter ended March 31, 2001. During April 2001, the Company notified CD holders
that the remaining $30.0 million of brokered CDs would be called May 24, 2001.
An additional $357,000 of expense was incurred during the second quarter ending
June 30, 2001, associated with the call of the brokered CDs. These CDs were
replaced with long-term advances from the FHLB at an average rate of
approximately 5.40% and an average life of approximately 4.9 years. The
Company's current policy allows for a maximum of $100 million in brokered CDs.
The potential of higher interest cost and lack of customer loyalty are risks
associated with the use of brokered CDs. At September 30, 2002 and December 31,
2001, the Company had no brokered CDs and brokered CDs represented zero percent
of deposits.

Average Short-term Interest Bearing Liabilities, consisting primarily of FHLB
Dallas advances and Federal Funds Purchased, decreased $19.1 million or 11.0% as
compared to the same period in 2001. Average Long-term Interest Bearing
Liabilities consisting of FHLB Dallas advances increased $26.4 million or 12.7%
compared to $207.7 million at September 30, 2001. The advances were obtained
from FHLB Dallas as part of the Company's balance sheet leverage strategy and
partially to fund long-term loans. FHLB Dallas advances are collateralized by
FHLB Dallas stock, securities and nonspecified real estate loans.

In May 1998 the Company implemented a leverage strategy designed to enhance its
profitability with acceptable levels of credit, interest rate and liquidity
risk. The leverage strategy consists of borrowing long and short-term funds from
the Federal Home Loan Bank and investing the funds primarily in mortgage-backed
securities, and to a lesser extent, long-term municipal securities. Although
mortgage-backed securities often carry lower yields than traditional mortgage
loans and other types of loans the Company makes, these securities generally
increase the overall quality of the Company's assets by virtue of the
securities' underlying insurance or guarantees, are more liquid than individual
loans and may be used to collateralize the Company's borrowings or other
obligations. While the strategy of investing a substantial portion of the
Company's assets in mortgage-backed and municipal securities has resulted in
lower interest rate spreads and margins, the Company believes that the lower
operating expenses and reduced credit risk of this strategy combined with
monthly monitoring of the Company's interest rate risk have enhanced its overall
profitability.

11

The Company will attempt to adopt a balance sheet strategy going forward to
gradually reduce the securities portfolio as a percentage of earning assets. On
the liability side, the Company will attempt to gradually reduce Federal Home
Loan Bank borrowings as a percentage of total deposits. The intended net result
is to increase the Company's net interest spread. The leverage strategy is
dynamic and requires ongoing management. As interest rates, funding costs and
security spreads change, the Company's determination of the proper securities to
own and funding to obtain must be re-evaluated. Management has attempted to
design the leverage strategy so that in a rising interest rate environment the
interest income earned on the premium mortgage-backed securities may increase to
help offset the increase in funding costs. As interest rates decrease the
interest income on the premium mortgage-backed securities may decrease due to
increased prepayments on these securities as funding costs decrease. Due to the
unpredictable nature of mortgage-backed securities prepayments and the slope of
the interest rate yield curve, net interest income could fluctuate more than
simulated under ALCO scenarios modeled. The Company does not maintain the
leverage strategy for any other reason at this time. One of the risks associated
with the asset structure the Company maintains is a lower net interest rate
spread and margin when compared to peers. This asset structure, spread and
margin increases the need to monitor the Company's interest rate risk.

Average Long-Term Junior Subordinated Convertible Debentures decreased from
$17.0 million at September 30, 2001 to $15.6 million at September 30, 2002.
During the nine months ended September 30, 2002, 217,194 convertible trust
preferred shares were converted into the Company's common stock. During the
third quarter ended September 30, 2002, 29,200 convertible trust preferred
shares were converted into the Company's common stock. Subsequent to September
30, 2002, an additional 45,270 convertible trust preferred shares were converted
into the Company's common stock. The total convertible trust preferred shares
converted to date represents 15.5% of the convertible trust preferred issue. As
a result of the timing of the conversions, the Company experienced a slight
reduction in the average yield on the remaining average outstanding balance of
the long-term convertible debt.

Average Long-Term Junior Subordinated Debentures remained the same at $20
million from September 30, 2001 to September 30, 2002.

12

The analysis below shows average interest earning assets and interest bearing
liabilities together with the average yield on the interest earning assets and
the average cost of the interest bearing liabilities.

SUMMARY OF INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES

(1) Loans are shown net of unearned discount. Interest on loans includes
fees on loans which are not material in amount.

(2) Interest income includes taxable-equivalent adjustments of $1,078 and
$705 as of September 30, 2002 and 2001, respectively.

(3) Interest income includes taxable-equivalent adjustments of $2,016 and
$1,560 as of September 30, 2002 and 2001, respectively.

(4) For the purpose of calculating the average yield, the average balance
of securities is presented at historical cost.

13

Noninterest Income

Noninterest income was $14.6 million for the nine months ended September 30,
2002 compared to $12.1 million for the same period in 2001. Deposit services
income increased $942,000 or 13.7% for the nine months ended September 30, 2002.
Deposit services income increased primarily as a direct result of the overdraft
privilege program and also due to increased numbers of deposit accounts and
increased deposit activity from September 30, 2001 to September 30, 2002. Other
noninterest income increased $1.3 million or 84.0% for the nine months ended
September 30, 2002 primarily as a result of increases in bank owned life
insurance income and mortgage servicing release fee income. During the fourth
quarter ended December 31, 2001, the Company purchased Bank Owned Life Insurance
in the amount of $15 million on all of its eligible Bank and Company officers at
the level of Vice President and above. The increase in cash surrender value is
shown as a component of noninterest income. The increases in mortgage-servicing
release fee income are reflective of the significant increase in refinancing of
single family home loans due to the lower interest rates. During the nine months
ended September 30, 2002, the Company had gains on the sale of securities of
$3.1 million compared to $3.0 million for the same period in 2001. The Company
sold available for sale securities during 2002 to restructure a portion of the
securities portfolio. Lower overall interest rates, the potential for increased
prepayment speeds and the overall dollar amount of tax free income were factors
considered when restructuring a portion of the securities portfolio.

On January 1, 2001, the Company adopted Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities," (FAS 133). As
allowed by FAS 133, at the date of initial application of this statement, the
Company transferred held to maturity securities with an amortized cost of $155.2
million into the available for sale category. In addition, the Company
transferred held to maturity securities with an amortized cost of $99.8 million
and a market value of $98.3 million into the trading category. The effect of
adopting FAS 133 is shown as a cumulative effect of a change in accounting
principle and reduced net income by $994,000 (net of taxes) during the first
quarter of 2001. The Company sold the securities transferred into the trading
category along with previously existing available for sale securities which
resulted in realized gains of $1.8 million or an after tax gain of $1.2 million.
These separate transactions allowed the Company to reposition the investment
portfolio while having a positive impact of $302,000 or $199,000 (net of taxes)
on consolidated net income for the first quarter of 2001.

The market value of the entire securities portfolio at September 30, 2002 was
$642.4 million with a net unrealized gain on that date of $12.4 million. The net
unrealized gain is comprised of $13.2 million in unrealized gains and $0.8
million in unrealized losses.

Noninterest Expense

Noninterest expense was $26.0 million for the nine months ended September 30,
2002, compared to $21.8 million for the same period of 2001, representing an
increase of $4.2 million or 19.4%.

Salaries and employee benefits increased $3.2 million or 24.9% during the nine
months ended September 30, 2002 when compared to the same period in 2001. The
Company has opened five new branches during this time period. These openings
combined with normal payroll increases and higher benefit costs were the primary
reasons for the increase. Direct salary expense and payroll taxes increased $2.6
million or 24.7% as a result of personnel additions for the nine months ended
September 30, 2002 when compared to the same period in 2001. Branch expansion
combined with normal payroll increases accounted for this increase. Retirement
expense increased $327,000 or 31.8% for the nine months ended September 30, 2002
when compared to the same period in 2001, primarily as a result of the increase
in the number of participants, level of performance of retirement plan assets
and actuarial assumptions. Health insurance expense increased $334,000 or 21.4%
for the nine months ended September 30, 2002 when compared to the same period in
2001. The Company has a self-insured health plan which is supplemented with stop
loss insurance policies. During the nine month period ended September 30, 2002,
the Company experienced higher costs associated with this plan.

14

Net occupancy expense increased $432,000 or 17.3% for the nine months ended
September 30, 2002 compared to the same period in 2001, largely due to branch
expansion, higher real estate taxes and depreciation expense.

Supplies expense increased $92,000 or 20.3% for the nine months ended September
30, 2002 compared to the same period in 2001 primarily due to branch expansion.

Other expense increased $498,000 or 14.1% for the nine months ended September
30, 2002 compared to the same period in 2001 primarily due to increases in
vehicle expense, bank analysis fees and losses on other real estate.

Provision for Income Taxes

The provision for income tax expense for the nine months ended September 30,
2002 was 14.9% compared to 22.0% for the nine months ended September 30, 2001.
The decrease in the effective tax rate and income tax expense is due to the
increase in tax free income for the nine months ended September 30, 2002 when
compared to the nine months ended September 30, 2001. The Company expects its
tax free income as a percentage of total income to gradually begin to decrease
which should gradually increase the Company's effective tax rate.

Capital Resources

Total shareholders' equity for the Company at September 30, 2002, of $78.2
million was up $9.6 million from December 31, 2001, and represented 5.99% of
total assets at September 30, 2002 compared to 5.37% of total assets at December
31, 2001. Increases to shareholders' equity during the nine months ended
September 30, 2002 were net income of $10.3 million, the issuance of 343,341
shares of the Company's common stock primarily through the conversion of
convertible trust preferred shares and the Company's dividend reinvestment and
incentive stock option plans of $3.0 million and an increase of $2.2 million in
net unrealized gains on securities available for sale. Decreases to
shareholders' equity consisted of $1.8 million in dividends paid to shareholders
and the purchase of 276,710 shares of the Company's common stock for $4.2
million.

Under the Federal Reserve Board's risk-based capital guidelines for bank holding
companies, the minimum ratio of total capital to risk-adjusted assets (including
certain off-balance sheet items, such as standby letters of credit) is currently
eight percent. The minimum Tier 1 capital to risk-adjusted assets is four
percent. A portion of the $20 million trust preferred securities is considered
Tier 1 capital by the Federal Reserve Bank. The Federal Reserve Board also
requires bank holding companies to comply with the minimum leverage ratio
guidelines. The leverage ratio is a ratio of bank holding company's Tier 1
capital to its total consolidated quarterly average assets, less goodwill and
certain other intangible assets. The guidelines require a minimum average of
four percent for bank holding companies that meet certain specified criteria.
Failure to meet minimum capital regulations can initiate certain mandatory and
possibly additional discretionary actions by regulation, that if undertaken,
could have a direct material effect on the Bank's financial statements. At
September 30, 2002, the Company and the Bank exceeded all regulatory minimum
capital requirements.

The Federal Reserve Deposit Insurance Act requires bank regulatory agencies to
take "prompt corrective action" with respect to FDIC-insured depository
institutions that do not meet minimum capital requirements. A depository
institution's treatment for purposes of the prompt corrective action provisions
will depend on how its capital levels compare to various capital measures and
certain other factors, as established by regulation.

It is management's intention to maintain the Company's capital at a level
acceptable to all regulatory authorities and future dividend payments will be
determined accordingly. Regulatory authorities require that any dividend
payments made by either the Company or the Bank not exceed earnings for that
year.

15

Liquidity and Interest Rate Sensitivity

Liquidity management involves the ability to convert assets to cash with a
minimum of loss. The Company must be capable of meeting its obligations to its
customers at any time. This means addressing (1) the immediate cash withdrawal
requirements of depositors and other funds providers; (2) the funding
requirements of all lines and letters of credit; and (3) the short-term credit
needs of customers. Liquidity is provided by short-term investments that can be
readily liquidated with a minimum risk of loss. Cash, Interest Earning Deposits,
Federal Funds Sold and short-term investments with maturities or repricing
characteristics of one year or less continue to be a substantial percentage of
total assets. At September 30, 2002, these investments were 22.7% of Total
Assets. Liquidity is further provided through the matching, by time period, of
rate sensitive interest earning assets with rate sensitive interest bearing
liabilities. The Company has three lines of credit for the purchase of federal
funds. Two $15.0 million and one $10.0 million unsecured lines of credit have
been established with Bank of America, Frost Bank and Texas Independent Bank,
respectively. Interest rate sensitivity management seeks to avoid fluctuating
net interest margins and to enhance consistent growth of new interest income
through periods of changing interest rates. Through this process, market value
volatility is also a key consideration.

The Asset Liability Management Committee of the Bank closely monitors various
liquidity ratios, interest rate spreads and margins, interest rate shock reports
and market value of portfolio equity (MVPE) with rates shocked plus and minus
200 basis points to ensure a satisfactory liquidity position for the Company. In
addition, the Bank utilizes a simulation model to determine the impact of net
interest income under several different interest rate scenarios. By utilizing
this technology, the Bank can determine changes that need to be made to the
asset and liability mixes to minimize the change in net interest income under
these various interest rate scenarios.

On November 2, 2000, the Company through its wholly owned subsidiary, Southside
Capital Trust II, (the "junior subordinated convertible issuer"), sold 1,695,000
cumulative convertible preferred securities (the "junior subordinated
convertible debentures") at a liquidation amount of $10 per convertible
preferred security for an aggregate amount of $16,950,000. These securities have
a convertible feature that allows the owner to convert each security to a share
of the Company's common stock at a conversion price of $9.07 per common share.
The debentures have a distribution rate of 8.75% per annum payable at the end of
each calendar quarter.

The proceeds received by the Company from the Trust II Issuer continues to be
used for general corporate purposes, including, but not limited to, capital
contributions to the Bank to support growth, for working capital, the repurchase
of shares of the Company's common stock and acquisitions by the Company.

Composition of Loans

The Company's main objective is to seek attractive lending opportunities in East
Texas and adjoining counties. Total Average Loans increased $41.6 million or
8.3% from the nine months ended September 30, 2001 to September 30, 2002. The
majority of the increase is in loans to municipalities and school districts. The
increase in Municipal Loans is due to a strong commitment in municipal lending.

Loan Loss Experience and Reserve for Loan Losses

The loan loss reserve is based on the most current review of the loan portfolio
at that time. An internal loan review officer of the Company is responsible for
an ongoing review of the Bank's entire loan portfolio with specific goals set
for the volume of loans to be reviewed on an annual basis.

A list of loans which are graded as having more than the normal degree of risk
associated with them are maintained by the internal loan review officer. This
list is updated on a periodic basis but no less than quarterly by the servicing
officer in order to properly allocate necessary reserves and keep management
informed on the status of attempts to correct the deficiencies noted in the
credit.

16

While management is aware of certain risk factors within segments of the loan
portfolio, reserve allocations have been made on an individual loan basis. An
additional reserve is maintained on the remainder of the portfolio of at risk
loans that is based on tracking of the Company's loan losses on loans that have
not been previously identified as problems.

For the third quarter and nine months ended September 30, 2002, loan charge-offs
were $347,000 and $1.5 million and recoveries were $51,000 and $217,000,
respectively, resulting in net charge-offs of $296,000 and $1.3 million. For the
third quarter and nine months ended September 30, 2001, loan charge-offs were
$421,000 and $1.0 million and recoveries were $103,000 and $539,000,
respectively, resulting in net charge-offs of $318,000 and $489,000.

Net charge-offs increased for the nine months ended September 30, 2002 due to
increases in the loan portfolio over the last three to four years, slight
changes in the economic conditions of the market area and three loan charge-offs
in excess of $50,000. As a result of this and other factors, the necessary
provision expense was estimated at $1.6 million for the nine months ended
September 30, 2002.

Nonperforming Assets

The categories of nonperforming assets consist of delinquent loans over 90 days
past due, nonaccrual and restructured loans, other real estate owned and
repossessed assets. Delinquent loans over 90 days past due represent loans for
which the payment of principal or interest has not been received in a timely
manner. The full collection of both the principal and interest is still expected
but is being withheld due to negotiation or other items expected to be resolved
in the near future. Generally, a loan is categorized as nonaccrual when
principal or interest is past due 90 days or more, unless, in the determination
of management, the principal and interest on the loan are well secured and in
the process of collection. In addition, a loan is placed on nonaccrual when, in
the opinion of management, the future collectibility of interest and principal
is in serious doubt. When a loan is categorized as nonaccrual, the accrual of
interest is discontinued and any remaining accrued interest is reversed in that
period; thereafter, interest income is recorded only when actually received.
Restructured loans represent loans which have been renegotiated to provide a
reduction or deferral of interest or principal because of deterioration in the
financial position of the borrowers. Categorization of a loan as nonperforming
is not in itself a reliable indicator of potential loan loss. Other factors,
such as the value of collateral securing the loan and the financial condition of
the borrower must be considered in judgments as to potential loan loss. Other
Real Estate Owned (OREO) represents real estate taken in full or partial
satisfaction of debts previously contracted.

Total nonperforming assets at September 30, 2002 were $3.3 million, up $935,000
or 38.9% from $2.4 million at December 31, 2001. Other real estate increased
$451,000 or 693.8% to $516,000 from December 31, 2001 to September 30, 2002. Of
this total, 9.5% consist of three residential dwellings, 53.2% is the
construction of a residential dwelling and 34.9% is a commercial building. The
Company is actively marketing all properties and none are being held for
investment purposes. From December 31, 2001 to September 30, 2002, nonaccrual
loans increased $1.2 million or 128.3% to $2.0 million. Of this total, 11% are
construction and land development loans, 25% are residential real estate loans,
9% are commercial real estate loans, 33% are commercial loans and 22% are loans
to individuals. Loans 90 days past due or more decreased $607,000 or 64.2% to
$338,000. Restructured loans increased $67,000 or 23.7% to $350,000. Repossessed
assets decreased $126,000 or 59.2% to $87,000.

Expansion

During the first six months of 2002 the Company opened five new full service
branches. Two of the branches are located in Whitehouse, two in Tyler and one in
Longview. Four of the full service branches are located in grocery stores.

17

Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 141 "Business Combinations" (FAS 141) and
Statement of Financial Accounting Standard No. 142 "Goodwill and Other
Intangible Assets" (FAS 142). FAS 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
Under FAS 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually (or more frequently if impairment
indicators arise) for impairment. Separable intangible assets that are not
deemed to have indefinite lives will continue to be amortized over their useful
lives (but with no maximum life). The amortization provisions of FAS 142 apply
to goodwill and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, the Company was
required to adopt FAS 142 effective January 1, 2002. The adoption of this new
accounting pronouncement did not have a material impact on the Company's
consolidated financial position or results of operations.

In June 2001, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 143, "Accounting for Asset Retirement Obligations" (FAS
143). FAS 143 requires liability recognition for retirement obligations
associated with tangible long-lived assets. The obligations included within the
scope of FAS 143 are those for which a company faces a legal obligation for
settlement. The initial measurement of the asset retirement obligation is to be
at fair value. The asset retirement cost equal to the fair value of the
retirement obligation is to be capitalized as part of the cost of the related
long-lived asset and amortized to expense over the useful life of the asset. FAS
143 is effective for all fiscal years beginning after June 15, 2002. The Company
does not believe that FAS 143 will have a material impact on its consolidated
financial statements.

In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 144, "Accounting for the Impairment and
Disposal of Long-lived Assets" (FAS 144). This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
FAS 144 supercedes FAS 121, "Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed of" and the accounting and reporting
provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of the business previously defined
in that opinion. FAS 144 also amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements" to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The provisions of
this statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. The adoption of FAS 144 did not have a material impact on its financial
statements.

In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 145, "Rescission of FAS 4, 44, and 64,
Amendment of FAS 13, and Technical Corrections" (FAS 145). This statement
updates, clarifies and simplifies existing accounting pronouncements with
respect to the accounting for gains and losses from the extinguishments of debt.
FAS 4 required all gains and losses from extinguishments of debt to be
aggregated and, if material, classified as an extraordinary item, net of related
tax effect. As a result of the rescission of FAS 4, the criteria in APB Opinion
No. 30 will now be used to classify those gains and losses. The provisions of
this statement are applicable to transactions occurring after May 15, 2002. The
Company does not believe that FAS 145 will have a material impact on its
consolidated financial statements.

18

In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" (FAS 146). This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The principal
difference between this Statement and Issue 94-3 relates to its requirements for
recognition of a liability for a cost associated with an exit or disposal
activity. This Statement requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred. Under
Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized
at the date of an entity's commitment to an exit plan. A fundamental conclusion
reached by the Board in this Statement is that an entity's commitment to a plan,
by itself, does not create a present obligation to others that meets the
definition of a liability. Therefore, this Statement eliminates the definition
and requirements for recognition of exit costs in Issue 94-3. This Statement
also establishes that fair value is the objective for initial measurement of the
liability. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The Company does not believe that FAS 146 will have a material
impact on its consolidated financial statements.

In October 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 147, "Acquisitions of Certain Financial
Institutions" (FAS 147). This statement is an amendment of FAS Statements No. 72
and 144 and FAS Interpretation No. 9. FAS Statement No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions", and FASB Interpretation
No. 9, "Applying APB Opinions No. 16 and 17 When a Savings and Loan Association
or a Similar Institution Is Acquired in a Business Combination Accounted for by
the Purchase Method", provided interpretive guidance on the application of the
purchase method to acquisitions of financial institutions. Except for
transactions between two or more mutual enterprises, this Statement removes
acquisitions of financial institutions from the scope of both FAS 72 and
Interpretation 9 and requires that those transactions be accounted for in
accordance with FAS 141, "Business Combinations", and FAS 142, "Goodwill and
Other Intangible Assets." Thus, the requirement in paragraph 5 of FAS 72 to
recognize (and subsequently amortize) any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable intangible
assets acquired as an unidentifiable intangible asset no longer applies to
acquisitions within the scope of this Statement. In addition, this Statement
amends FAS 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," to include in its scope long-term customer-relationship intangible
assets of financial institutions such as depositor- and borrower-relationship
intangible assets and credit cardholder intangible assets. Consequently, those
intangible assets are subject to the same undiscounted cash flow recoverability
test and impairment loss recognition and measurement provisions that FAS 144
requires for other long-lived assets that are held and used. The Company does
not believe that FAS 147 will have a material impact on its consolidated
financial statements.

19

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the banking industry, a major risk exposure is changing interest rates. The
primary objective of monitoring the Company's interest rate sensitivity, or
risk, is to provide management the tools necessary to manage the balance sheet
to minimize adverse changes in net interest income as a result of changes in the
direction and level of interest rates. Federal Reserve Board monetary control
efforts, the effects of deregulation and legislative changes have been
significant factors affecting the task of managing interest rate sensitivity
positions in recent years.

In an attempt to manage its exposure to changes in interest rates, management
closely monitors the Company's exposure to interest rate risk. Management
maintains an asset/liability committee which meets regularly and reviews the
Company's interest rate risk position and makes recommendations for adjusting
this position. In addition, the Board reviews on a monthly basis the Company's
asset/liability position. The Company primarily uses two methods for measuring
and analyzing interest rate risk: Net income simulation analysis and market
value of portfolio equity modeling. Through these simulations the Company
attempts to estimate the impact on net interest income of a 200 basis point
parallel shift in the yield curve. Policy guidelines limit the estimated change
in net interest income to 10 percent of forecasted net income over the
succeeding 12 months and 200 basis point parallel rate shock. Policy guidelines
limit the change in market value of equity in a 200 basis point parallel rate
shock to 20 percent of the base case. The results of the valuation analysis as
of September 30, 2002, were within policy guidelines. This type of stimulation
analysis requires numerous assumptions including but not limited to changes in
balance sheet mix, prepayment assumptions and changes in spreads. Assumptions
are based on management's best estimates but may not accurately reflect actual
results under certain changes in interest rates. As a result, failure to
accurately predict may have a material impact on the financial condition of the
Company.

20

The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. Except for the
effects of prepayments and scheduled principal amortization, the table presents
principal cash flows and related weighted average interest rates by the
contractual term to maturity. Nonaccrual loans are not included in the loan
totals. All instruments are classified as other than trading.

EXPECTED MATURITY DATE
(dollars in thousands)

21

Residential fixed rate loans are assumed to have annual prepayment rates between
9% and 35% of the portfolio. Commercial and multi-family real estate loans are
assumed to prepay at an annualized rate between 8% and 40%. Consumer loans are
assumed to prepay at an annualized rate between 8% and 30%. Fixed and
adjustable rate mortgage-backed securities, including Collateralized Mortgage
Obligations ("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs"),
have annual payment assumptions ranging from 6% to 50%. At September 30, 2002,
the contractual maturity of substantially all of the Company's mortgage-backed
or related securities was in excess of ten years. The actual maturity of a
mortgage-backed or related security is less than its stated maturity due to
regular principal payments and prepayments of the underlying mortgages.
Prepayments that are faster than anticipated may shorten the life of the
security and affect its yield to maturity. The yield to maturity is based upon
the interest income and the amortization of any premium or discount related to
the security. In accordance with generally accepted accounting principles,
premiums and discounts are amortized over the estimated lives of the loans,
which decrease and increase interest income, respectively. The prepayment
assumptions used to determine the amortization period for premiums and discounts
can significantly affect the yield of the mortgage-backed or related security,
and these assumptions are reviewed periodically to reflect actual prepayments.
Although prepayments of underlying mortgages depend on many factors, including
the type of mortgages, the coupon rate, the age of mortgages, the geographical
location of the underlying real estate collateralizing the mortgages and general
levels of market interest rates, the difference between the interest rates on
the underlying mortgages and the prevailing mortgage interest rates generally is
the most significant determinant of the rate of prepayments. During periods of
falling mortgage interest rates, if the coupon rate of the underlying mortgages
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing may increase and accelerate the prepayment of the underlying
mortgages and the related security. At September 30, 2002, of the $483.1 million
of mortgage-backed and related securities held by the Company, an aggregate of
$480.1 million were collateralized by fixed-rate mortgage loans and an aggregate
of $3.0 million were collateralized by adjustable-rate mortgage loans.

The Company assumes 70% of savings accounts and transaction accounts at
September 30, 2002, are core deposits and are, therefore, expected to roll-off
after five years. The Company assumes 30% of Money Market accounts at September
30, 2002 are core deposits and are, therefore, expected to roll-off after five
years. The Company does not consider any of its Platinum Money Markets accounts
as core deposits. No roll-off rate is applied to certificates of deposit. Fixed
maturity deposits reprice at maturity.

In evaluating the Company's exposure to interest rate risk, certain limitations
inherent in the method of analysis presented in the foregoing table must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable rate mortgages, have
features which restrict changes in interest rates, prepayment and early
withdrawal levels may deviate significantly from those assumed in calculating
the table. Finally, the ability of many borrowers to service their debt may
decrease in the event of an interest rate increase. The Company considers all of
these factors in monitoring its exposure to interest rate risk.

ITEM 4. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in enabling it to record,
process, summarize and report information required to be included in the
periodic SEC filings within the required time period. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the date the Company
carried out its evaluation.

22

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is a party to certain litigation that it considers routine
and incidental to its business. Management does not expect the results of
any of these actions to have a material effect on the Company's business,
results of operations or financial condition.

ITEM 2. CHANGES IN SECURITIES

Not Applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable

ITEM 5. OTHER INFORMATION

Not Applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits -

Exhibit
No.

* 99.1 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

----------

* Filed herewith.

(b) Reports on Form 8-K - None

23

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

SOUTHSIDE BANCSHARES, INC.
(Registrant)

BY: /s/ B. G. HARTLEY
------------------------------------------
B. G. Hartley, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)

DATE: November 12, 2002
-----------------------

/s/ LEE R. GIBSON
------------------------------------------
Lee R. Gibson, Executive Vice
President (Principal Financial
and Accounting Officer)

DATE: November 12, 2002
-----------------------

24

CERTIFICATIONS

I, B. G. Hartley, certify that:

1. I have reviewed this quarterly report on Form 10-Q of
Southside Bancshares, Inc.

2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date") ; and

c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have significant
role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.

Date: November 12, 2002 By: /s/ B. G. HARTLEY
-------------------------
B. G. Hartley
Chairman of the Board and
Chief Executive Officer

25

CERTIFICATIONS

I, Lee Gibson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of
Southside Bancshares, Inc.

2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date") ; and

c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have significant
role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.

Date: November 12, 2002 By: /s/ LEE R. GIBSON
----------------------------
Lee R. Gibson
Executive Vice President and
Chief Financial Officer

26

Exhibit Index